Applying for a bank loan can be a frustrating and mystifying experience for small-business owners. Here’s a brief guide to what makes bankers tick and some tips to help you navigate their world.

The main concern bankers have is protecting their capital, money with which their depositors have entrusted them. Consequently, bankers are generally very conservative. Their first priority is to recoup the principal of the loan. Their next priority is to earn a reasonable rate of interest on the loan. And their third priority is that you prosper and open more accounts with them. Safety of principal is paramount. Bankers are not in the risk business.

Your job is to provide the banker with as many reasons to feel safe as you can. You start with a loan or financing proposal--a statement of what you need, why you need it, when you need it, and how you plan to repay it. The documentation should include a description of how much you need and what you'll do with the loan, up-to-date balance sheets, cash-flow pro formas and projected income statements. All banks have forms to help you prepare these, but using your own business plan increases your credibility.

What do bankers look for when considering a financing proposal? The "Six C’s of Credit" provides a start.

The Six C’s of Credit

Character: Personal character is most important since all loans to small businesses are personal loans. The bank's experience with you is critical. The judgment on the character of an individual is based on past performance. Personal credit histories as well as business credit histories will be reviewed.

Capacity: This is figured on the amount of debt load your business can support. The debt-to-net-worth (debt/net worth) ratio is often used to justify a credit decision. A highly leveraged business with a high debt/net worth ratio is perceived as less creditworthy than a company with low leverage (low debt/net worth).

Your business plan can make a difference. Suppose it shows that the loan will increase earnings and lead to a swift reduction in the debt/net worth ratio. Your chances of a positive answer would increase. Keep in mind that a good banker--and you can't afford an inept banker who loads you up with unnecessary debt--is the ultimate realist. Don't try to snow your banker with numbers.

Conditions: Economic conditions, both regional and national, have a profound effect on credit decisions. If the bank is persuaded that a depression is coming, it won't extend credit easily.

Collateral: Collateral is a secondary source of loan repayment. They want the loan repaid from operating profits and inventory so you become a bigger, better borrower and depositor. But just in case things go sour, a bit of collateral makes your banker sleep better at night.

Credibility: Do you know your business? Can you be counted on to be level-headed? How credible are your plans? Are they a collage of dreams or a carefully reasoned and researched plan with a high chance of success? A business plan helps you answer the banker's questions without hesitation, sending your credibility rating soaring.

Contingency plan: A contingency plan is a useful financing tool. Bankers like to see that you look ahead. A contingency plan proves forethought. A contingency plan is a short worst-case business plan that examines the options that would be open to the business and how those options would be treated. Decisions made in panic are poor decisions. A contingency plan avoids panic (both yours and your banker's).

Bankers and RiskBankers are risk-averse by training and temperament. They can't take the kinds of risks a venture capitalist or private investor might; that isn't their job. They tend to shun startups. They hate surprises. This leads to misunderstandings between small-business owners and bankers. Small-business owners, actual or prospective, have to learn that the relationship between them and their bankers should be businesslike. It certainly should not be hostile, antagonistic or demeaning, yet often is perceived that way.

Why do bankers turn down loan applications? Except for bank credit policy reasons or banking law, applications are rejected for the following credit-related reasons:

Too little owner's equity

Poor earnings record

Questionable management

Low-quality collateral

Slow/past-due trade or loan payment record

Inadequate accounting system

Startup or new company

Poor moral risk

Other (only 4 percent of rejections have other reasons)

Make sure you cultivate bankers for their advice and support, have more than one bank, and be prepared to ask why credit is denied before getting angry.

How to Get to Know Your BankerTake your banker to lunch. Always be honest with him or her. It pays. Make appointments before dropping in. Bankers are businesspeople and appreciate ordinary business courtesy. Keep in mind that your relationship with your banker should be cooperative, not antagonistic, subservient, fawning, obsequious, mistrustful or fearful.

A good banker is a terrific asset, so shop around to find a banker you can work with. The role of your banker is to help you make your business successful. A good banker will sometimes do things that you don't agree with, such as turn down a loan request or try to get you to maintain a cautious debt/net worth ratio. How do you find a good banker? Ask around. Ask other business owners, ask your accountant or lawyer, or other advisors. Ask your friends. Think of it as shopping for a partner: What would you do to find a person who can help make your business more successful?

Know the kind of credit you need. The basic rule is to fit the term of the loan to the purpose. A real estate loan will run 15 years or more and be repaid from operating profits, while an inventory loan is short-term and gets repaid from the inventory turn. Some loans call for term payments that include principal and interest, others for interest only with lump sum principal reductions. The package can become complex. If in doubt, ask your banker for advice: "I want to expand. Here's the loan I think I need. What do you think?" That's a lot better than asking for the wrong loan at the wrong time in the wrong way. Your banker wants you to succeed and knows (if he or she is any good) that there's a high correlation between asking for (and heeding) professional advice and making a small business grow profitably.

Avoid surprises. If you face a problem, let your banker know immediately. Don't wait until it's a Friday night "gimme a loan or I go broke" issue. Let your banker work with you. Your banker's job is lending money and protecting depositors' assets. If your proposal is sound, you'll get your loan. If it isn't sound, you shouldn't. And if you disagree with your banker, be prepared to back up your renewed application with facts.

Establish more than one banking relationship. Spread the risk. Don't be dependent on one banker. Bankers move, retire, get promoted, leave banking, and have squabbles with the loan review committee. Plus, a line of credit may have to be paid out for 90 days each year. If you have two banks, you use both, keep both happy, satisfy the bank examiners, and have surplus credit available if you need it.